Normally countries shift from agriculture to industry and then later to services, but India shifted directly from agriculture to services. What are the reasons for the huge growth of services vis-a-vis industry in the country? Can India become a developed country without a strong industrial base? (150 words, 10 marks).

India’s unconventional transition from agriculture to services bypassing a significant industrial phase has sparked curiosity and debate. The exponential growth of services in India can be attributed to several factors. Firstly, advancements in technology and communication have facilitated the rise of outsourcing, leading to a surge in IT, finance, and other service sectors. Additionally, India’s large English-speaking workforce and relatively lower labor costs have made it an attractive destination for global businesses seeking skilled services. Moreover, favorable government policies and investments in education have further propelled the service sector’s expansion. However, while services have been a major driver of India’s economic growth, the lack of a robust industrial base raises concerns about sustainability and inclusivity. Without a strong manufacturing sector, India may face challenges in generating employment and achieving balanced development, potentially hindering its journey towards becoming a developed nation.

Tag: Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth. Indian economy and issues related to planning, mobilization of resources, growth development and employment.  

Decoding the Question:  

• In the intro try to write a contextual introduction.  
• In Body,  
• Discuss the reasons behind this shift  
• Justify the need for the manufacturing industry and why it needs to make India a developed country.  
• Try to conclude, answer by writing about the manufacturing sector and the $5trillion dollar economy.  

Answer:   

The natural economic progression of a nation goes from agrarian economy, to industrial economy to a service economy. India leap-frogged from an agrarian economy to a service economy. Gross Value Added (GVA) at current prices for the services sector accounts for 53.89% of India’s GVA. The Industry sector contributes 25.92% to GVA. Agriculture and allied sectors share is 20.19%. The services sector accounted for 18.1 per cent of the total employment during 1965-66, going up to 23.5 per cent in 1999-2000.   

There was a certain reason behind this direct shift, which can be understood in the following manner:  

• Globalization and LPG policy: In 1991 India started opening its economy in terms to achieve greater integration of the world economy and rapid economic development. These policies created were mainly inclined towards the service sector.  
• External demand and skilled manpower: Once India became part of the global market, the fluent English-speaking skills and technological know-how fulfilled the demand for the services outsourcing such as KPO, BPO. The cost-effective and efficient service delivery made India a preferred destination for service sector investments.  
• License Raj:  The permit system and license raj were the great impediments even after New Economic Policy. This bureaucratic process hindered the growth of the manufacturing or secondary sector. But on the other hand, service sectors did not face any such issues and available resources made fertile ground for its growth.  
• Income Elasticity of Demand for Services: A rising share of services in GDP is regarded as an outcome of higher income elasticity of demand for services. Income elasticity of demand for services increases with rising income which favours the fulfillment of more sophisticated desires. During the development process, distribution of GDP and employment register sectoral shifts. Such shifts may occur on account of the hierarchy of needs, distinguished into basic needs for food and shelter and needs for other material and non-material goods including services.   
• Services, Employment and Productivity: While agricultural and manufacturing activities account for a major share of employment in developing countries, services activities account for a major portion of employment in most developed countries. Lagging productivity in the services sector is considered as the main reason behind the rising share of service employment in total employment even though the share of services in real GDP remains constant,i.e. Baumol’s cost disease.  

Can India become a developed country without a strong industrial base?  

• Many economists view industrialization as the only route to rapid economic development for developing countries. Its potential lies in mass employment generation-ability as well as ability to strengthen domestic consumption.  
• However, the 4^th Industrial revolution and digital technological changes have changed the growth drivers in developing and developed countries. Technology enabled services have lowered transaction costs and overcome problems of asymmetric information making this sector more dynamic than in the past. The emergence of e-commerce platforms is an example of how digital revolution can lower transaction costs, increase productivity as well as make it more inclusive.  
• For many internet-based businesses or services, fixed up-front costs can be high initially, but once the physical infrastructure is in place, each additional customer, user, or transaction incurs very little extra cost.   
• On the other hand, still, it is imperative to grow the manufacturing sector not just to provide employment to the largest number of working population (to absorb the labour force from agriculture), but also to boost self-reliance and reduce total dependence on imports.   
• Apart from this, a solid and higher industrial base is much required for the growth of the agriculture and services sector and all the three sectors are dependent on each other therefore the growth of the manufacturing sector is imperative for the growth of the other sectors.  
• Industry exports are also important to increase forex reserve industries and integration to the global supply chain.   

Since India skipped the manufacturing stage, its heavy industries sector is relatively under-developed. Through NIMZs and other innovative ventures, foreign investment in India’s domestic manufacturing sector must be encouraged. This will also lead to a growth in infrastructure and production abilities of the country.Therefore, there is still rationale for making India an Industrialized nation. In fact, it shall provide a much needed base for sustained growth of India in coming decades. Mere reliance on the service sector as a driver of growth is neither pragmatic nor sustainable. To make India a $ 5 trillion dollar economy it is imperative to have a robust Industrial sector. 

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